Lu Lindi became an avid online shopper during China’s coronavirus lockdown earlier this year, using the Alipay app on his smartphone to pay for everything from powdered milk to Chinese medicines.
But the 54-year-old didn’t realize for weeks that instead of debiting his account, Alipay was actually funding his shopping spree by issuing him a credit.
Mr. Lu was not alone. Alipay’s credit activity is so huge that it now issues about a tenth of all China’s non-mortgage consumer loans. And a number of other clients have told the Financial Times that they believe the app is designed for people to take loans, sometimes without their knowledge.
As Alipay owner Ant Group approaches a $ 30 billion IPO in Hong Kong and Shanghai, the rapid growth of its credit business has been a key selling point for investors.
In his enrollment documents, Ant revealed that his CreditTech unit’s revenue, which largely consists of the fees partner banks pay Ant for arranging loans, increased 59% over the past six months. ending in late June and now account for 39 percent of its total sales.
Kevin Kwek, an analyst at Bernstein, estimated that Ant earns a commission of around 2.5% for every loan she places.
The credit arm, which also lends to small businesses, has transformed Ant, which originally built up its base of over 700 million monthly users into a simple mobile payment app. But with Chinese regulators circling consumer loans, analysts are unsure whether such rapid growth can continue.
Ant’s consumer loan business consists of two products: Huabei, which is similar to a traditional credit card, and Jiebei, which are small unsecured loans made through the Alipay app.
Users say they are directed to both of these products with discounts and offers, and sometimes Alipay uses Huabei to pay by default, even though they don’t intend to use the credit.
“It makes you use Huabei all the time,” said Vincent Cheng, 38. “As soon as your default payment method is not Huabei, the app will continuously offer discounts and promotions at checkout for you to pay with Huabei.”
“Once you accidentally pay with Huabei, it becomes the default,” Mr. Cheng said.
About 500 million users borrowed from Huabei and Jiebei in the year through June 30; Huabei’s average outstanding balance was around 2,000 Rmb ($ 295) as of June 30.
Janine Wong said she ended up paying with Huabei so often that she set a credit limit of Rmb 500 to minimize its usage by mistake. But that did not solve the problem.
“They automatically increased my credit limit temporarily, so sometimes even though my credit balance wasn’t supposed to be enough to pay for something, it was still paid with Huabei if I wasn’t careful,” she said. .
Ant said if users have questions, the company’s customer service is there to help. In its IPO prospectus, the company said it would automatically deduct funds from users’ Alipay accounts or connected debit cards, so that if consumers unwittingly pay with Huabei, they don’t pay interest. as long as they have enough money in their accounts at the end of the interest-free period.
Mr Kwek said he did not expect the lending industry to grow at the pace of the past two years, but noted that the overall loan growth in China is 12-14% per year. and that Alipay has powerful techniques to keep people borrowing. . “With the link with payments, you have a unique basis for growth,” he said.
Meanwhile, Beijing has continuously tightened its online lending regulations in recent years, putting 99% of peer-to-peer lenders out of business but bolstering the positions of Ant, Tencent and a number of other major apps.
As a result, Ant disbursed more loans and had issued a total of Rmb 1.7 billion in consumer credit outstanding as of June 30, more than the retail loan portfolio of any Chinese bank.
But the regulations also forced him to partner with banks. Of Ant’s outstanding consumer loans, 88% were loaned directly by banking partners, including its subsidiary MYbank, 10% were securitized and sold on the market, and 2% was held in its own balance sheet at June 30th.
In August, the Supreme Court of China ruled that the maximum interest rate on loans should be capped at four times the prime lending rate, or 15.4% per annum, which could affect the small portion of loans that ‘Ant does directly or titrates.
Ant has said the majority of his borrowers are already paying around that rate or less and someone familiar with the matter said the court ruling would be immaterial.
But Zhao Xijun, a finance professor at Beijing Renmin University, said his banking partners could face even stricter interest rate caps in the future.
“It’s a general trend for China to control and lower interest rates on loans. . . licensed establishments are subject to strong oversight and their risk premium is lower, so they are likely to be assigned a maximum rate of even less than four times the LPR, ”Zhao said.
Yet in recent years Ant’s business has faced numerous regulatory hurdles and has managed to develop new businesses to compensate for restricted areas. “Innovations happen when you have a lot of challenges,” said a person close to the company.